Buy steel better
Deere & Co. eyes mill product standardization, supplier consolidation.
By -- Purchasing, 12/8/2000 2:00:00 AM
Not long after he became vice president of worldwide supply management, R. David Nelson was told by his steel suppliers that Deere & Co. was a "lousy customer." That was a blow to the corporate ego, since steel has been a very important commodity for the company since John Deere began using it to make plows in the late 1830s.
But, it also was the spark Nelson needed to ignite a corporate re-evaluation of domestic and global purchasing and supply chain management systems at the Moline, Ill.-based world leader in the production of agricultural, construction, industrial and grounds-care equipment.
"In reality," says Nelson, "the criticism was a beautiful opportunity for purchasing to get the corporate commitment to develop a world-class supplier base, for the supply management personnel to take a hard look at how we are buying and should be buying, and for the authority to make the changes needed to buy materials and services better and to better manage suppliers."
"So, during the past two-plus years, we've been making significant changes in the way we approach supply management. At the center of this change is an effort to coordinate supply chain strategies across the enterprise and implement common strategies to raise the quality and improve the delivery of supply," he tells Purchasing. "This represents a cultural change for a company that historically has been successful using a decentralized approach to buying and manufacturing."
At the very beginning, 163 years ago, John Deere found that American steel of the quality he needed was unavailable, so he went to England for it. Nelson explains that "as American steel became available, supply became American, but the need for high quality did not change." Since that need for quality materials hasn't changed over these many decades, Deere & Co. is entering the millennium by rethinking its purchasing, logistics and supply management programs. It now is in the process of standardizing specifications for production materials, consolidating worldwide purchasing into a single system, and screening suppliers' performance with an eye toward reductions.
At present, the firm has 14,000 suppliers worldwide who provide some $7 billion worth of products and services annually to 80 plants in 17 countries. According to Nelson "that's probably 13,000 suppliers too many." So the company has created supply management teams who are working with 92 full-time supplier development engineers worldwide to develop a cadre of world-class suppliers, to reduce purchasing costs, and to improve material quality and delivery.
The game plan is still under development, but Deere's commodity procurement teams soon will be naming a shortened list of preferred suppliers based on criteria weighted 65% toward service and 35% toward price. The broad-based goals include a supply base that delivers on time, commits to 50% annual cost of quality improvements, helps supply management achieve 5%-10% annual total-cost reductions, and assists supply management in reaching 20% annual improvement in productivity.
This is part of a corporate project "to streamline business processes and promote operational excellence throughout the enterprise," says Robert W. Lane, the company's president and chief executive officer. "Besides bringing substantial financial benefits, notably in areas such as supply management, these actions often lead to cycle-time and defect-rate improvements of 30%-40% in addition to higher levels of customer satisfaction." And, according to Nelson, cycle-time reductions are important. "Reducing cycle times in a competitive global environment is a key driver," he says, "since reducing key material leadtimes from 30 days to three days and then to three hours affects many things-from in-house inventory handling costs to work-in-process inventories to workplace injury costs."
Why Deere looks globally
Deere is the world's largest maker of farm equipment, which accounts for more than 40% of its $11.5 billion in annual sales. It also is a leading producer of industrial, construction, forestry and lawn-care equipment. Deere also makes drivetrain components, diesel engines, chainsaws, lawn trimmers, leaf blowers and snow blowers. Although the firm markets globally now, the U.S. and Canada still account for more than 75% of sales.
Lane says that Deere is working to become bigger, better and more distinctive. "The growth efforts for John Deere-brand products are centered around international expansion and new products in agricultural equipment, a focus on large customers in construction equipment, and a stepped-up emphasis on agribusiness."
So, says Nelson, supply management has to become the key player in cutting materials and service costs as well as boosting quality by integrating world-class suppliers into Deere's global business plan.
"Highlighting our pursuit of genuine value through continuous improvement is an aggressive business-process excellence initiative moving ahead in every corner of the corporation," says Lane. So, the company has initiated hundreds of team-based Six Sigma-like projects to streamline business processes, from purchasing to manufacturing, and promotes operational excellence throughout the enterprise. "We want to work with our suppliers and within our own factories to remove waste that adds to cost," he says.
The revamp of global supply management is being spearheaded by Nelson, the former vice president of purchasing at Honda of America, who guided that supply management group to Purchasing's Medal of Professional Excellence for superior supply management in 1995.
After a decade with Honda, Nelson came to Deere three years ago to reinvigorate the purchasing organization. Key to his agenda is the development of suppliers "who will be receptive to change."
Nelson maintains that "continuing to do business as we always have is a roadmap to disaster," so "we will be looking for suppliers that embrace change and energetically support our efforts to eliminate waste and improve quality." For steel, that means it will award its future business to suppliers-mills, service centers, distributors and processors-with an international presence, extensive processing capabilities, and sophisticated information technology. "And we expect to see large savings realized through more strategic sourcing and consolidation of grades and sizes," he adds.
Nelson believes that "receptivity to change is an absolute necessity in today's global business environment." So, Deere's supply management reorganization efforts involve indirect materials and services (including computers, travel and temporary services); such production materials as nonferrous castings, metal stampings, metal forgings and plastic resins; and such components as paint and decals, belts and hoses, hydraulics, tires and wheels, bearings, fasteners and springs, and even tooling. But, it is steel that is getting the lion's share of emphasis just now.
Why steel? The company's North American manufacturing plants and parts fabricators spend $1 billion annually for the steel used to make combine harvesters, agricultural tractors, hydraulic excavators, construction equipment, commercial utility tractors, material-handling equipment, rotary cutters and utility vehicles, forestry equipment, air seeding equipment, sugarcane harvesters, spraying equipment, hay and forage equipment, lawn and garden equipment, walk-behind mowers and lawn tractors, commercial and golf and turf mowers, planting equipment, tillage tools, cultivating equipment cotton harvesting, planting equipment, power transmission equipment and handheld power products.
How Deere buys steel
"A significant portion of our steel sourcing has been done on a factory-by-factory basis," Nelson explains. "Purchases of steel products not common to multiple factories have never been coordinated, nor have purchases from service centers and processors. These have all been sourced at each factory's discretion. Only mill steel purchases of steel products common to multiple factories have been coordinated, and even those products have only been coordinated within North America. This has resulted in too many suppliers, too many unique steel items, and too little coordination between U.S. and non-U.S. manufacturing facilities."
He says that steel buying approach now is changing. "We're taking steps to optimize our entire global supply chain by better coordinating the sourcing of our commodities, materials and services-steel included," he says. "This will result in fewer suppliers, consolidation of steel grades and sizes, better utilization of the global supply base, and standardization of business practices among factories."
At present, Deere's 30 North American plants use steel bought 25% directly from mills, service centers and processors, and the rest sourced indirectly through parts suppliers. Since this spring, the Moline, Ill., company has had a Steel Team in place that has been given the corporate resources to standardize product, delivery and service specification and consolidate suppliers into a smaller corps of supply partners. "In steel, at present, we do business with 23 mills, 18 service centers and five processors," says Nelson. "I can tell you this will change."
Today, the steel purchased directly by Deere factories is 81% flat-rolled products, 11% tubing, 6% hot-rolled bar and about 2% cold-finished bar. However, a product analysis found that worldwide the company is being supplied with a multitude of different grades of steel in thousands of unique sizes. That has to change, Nelson says. "What we've already found is that different engineers in different countries at different times specified different mill products from different suppliers, yet there's no difference in a John Deere tractor being made in Iowa or Brazil or Germany," says Nelson. "So, we are developing a five-year plan to standardize product specifications and all the other things that will help us eliminate cost and waste from the steel supply chain."
Under Marianne Collison, steel project manager, the Steel Team is a group of seven purchasing, supply management, metallurgical engineering and market analysis professionals charged with consolidating Deere's annual steel buy into a more efficient, cost-effective system. First in North America and then worldwide.
"Nearly all steel used in our U.S. facilities is purchased from domestic producers," she says. "As we proceed with plans to develop global sourcing strategies for steel, we'll study steel producers around the world to select the very best, most competitive suppliers for the future." In effect, Collison is overseeing some dramatic changes in Deere's steel buyer/supplier relationships.
In the past, buyers at individual Deere plants selected steel sizes and chemistries that fit local manufacturing operations and paid little if any attention to the steel sourcing done by its part suppliers. That is going to change. "Deere will have a select group of suppliers handling our steel needs in a supply program where we all come out ahead," notes Collison. "We're not trying to take money out of anybody's pocket; we're going to be working with them very carefully to develop a supplier business that's attractive for them and cost-effective for Deere."
Deere's supply-management philosophy "is one of total value to our customers," Collison says. "We will source steel according to quality and price." She says that means that "we will be working very hard to get our key suppliers to focus on improving quality and cutting costs at the same time." Deere also is putting high priority on selecting suppliers with superior computer systems that can collect and analyze management information, she says. Collison adds that steel suppliers "will have to have an Internet presence today and use or intend to use Internet technology to streamline their own sales and procurement processes."
Deere has chosen the Ariba B2B Commerce Platform to help transform the company's purchasing processes and to power other e-commerce efforts. Nelson says the Ariba software eventually will streamline purchasing processes and create new Internet opportunities for business-to-business transactions. "We are aggressively pursuing our objective to run lean and will use Ariba's e-commerce solutions to implement a more efficient Internet-based system in supply management," says Nelson. Under the plan, John Deere will first impact the purchase of indirect materials and services for the company's factories, engineering centers and sales and marketing offices worldwide. No timetable has been set for direct materials purchases yet because of the legacy EDI systems that are being used heavily for data tracking as part of the supply chain revamp. "Transactional use will increase rapidly in the next few years, though," he says.
New buying plan will evolve
Nelson says Deere is moving slowly in evaluating the steel supply base to choose truly world-class suppliers upon which to build a future. But, by the time the analysis of the supply base is done and the suppliers of the future are chosen, Nelson says, "we will know more about the world steel marketplace than anybody else." In fact, besides traditional suppliers, the company has identified small diverse or woman-owned suppliers with the potential for greater roles in the company's supply base.
"Choosing and using the best steel suppliers isn't a one-way street," according to Nelson, since his steel purchasing group "expects the best suppliers to help Deere be a better customer." He explains that the strength of Deere's supply chain will distinguish the John Deere brand from its competitors, and, if chosen well, will offer Deere a global competitive advantage. And that's why "purchasing has to be about relationships," explains Collison. She maintains that "buyers and sellers are inextricably tied together and cannot exist without each other."
Collison rejects the concept of suppliers and manufacturers being at odds with each other. "In spite of all the politically correct talk about partnerships, alliances and win-win negotiations, as buyers and sellers, we've operated under the basic misconception that our relationship is a zero-sum game." She rejects the view that if the buyer gains some advantage, the seller must lose, and vice versa. So, Collison has been encouraging Deere's part suppliers to work with Deere in sourcing their steel requirements. "We don't want to buy the steel our suppliers need," explains Collison, "but we want them to have better availability of higher-quality material at lower prices so they can pass these efficiencies along to Deere in lower-priced parts."
The qualities of world-class suppliers
What makes the best metals suppliers the best? Here are the views, in his words, of R. David Nelson, vice president of worldwide supply management, at Deere & Co.:
"The best suppliers are receptive to change."
This is an absolute necessity in today's business environment. Continuing to do business as we always have is a roadmap to disaster. So, an overall supplier company philosophy must be evident in every employee that new ideas can work. We look for suppliers that embrace change and whose employees will both suggest improvements and energetically support our efforts to eliminate waste and improve quality.
"The best suppliers provide regular access to all disciplines."
And that includes upper management. It's important that our suppliers are on the same wavelength with us as we implement growth initiatives across the enterprise. This can only be accomplished by sharing and aligning business plans and moving together in-step to accomplish them. Frank exchange of information at all appropriate levels within both organizations must occur to meet today's operational needs and longer-term opportunities.
"The best suppliers help purchasing be a better customer."
We are choosing carefully the world-class suppliers to build our future with. The strength of our supply chain will distinguish us from our competitors and, if chosen well, will offer us a competitive advantage. Our suppliers are important stakeholders in gaining global competitive advantage."
A brief history of John Deere and steel
John Deere is a big, old company that loves innovation. Its founder was born in Rutland, Vt., in 1804 and grew up in Middlebury, where he received a common school education and served a four-year apprenticeship learning the blacksmith trade. In 1825, when the Industrial Revolution was picking up speed, Deere began his career as a journeyman blacksmith, and he soon gained considerable fame for his careful workmanship and ingenuity. Highly polished hay forks and shovels were in great demand in western Vermont. But in the mid-1830s, a downturn and emigration from the East lured Deere West. He took with him a small bundle of tools and some cash, and left his wife and family behind; they were to rejoin him later.
The trip took the Vermonter by canal boat, lake boat and stagecoach, and finally, like others before him, Deere found himself in territory settled by fellow Vermonters, the village of Grand Detour, Ill. The blacksmith was so welcomed that within two days after his arrival in 1836, Deere had built a forge and was in business.
One of Deere's first breakthroughs led to the company's founding and a long series of innovations that won the company dominance in the world agricultural equipment market. The cast-iron plows that the Midwestern farmers had brought with them from the East did not work well in the rich, Mississippi Valley soil; every few steps the farmer had to stop and clear off the plow blade. Plowing became a slow and tiring task, and some farmers considered moving on.
But Deere studied the problem and became convinced that a plow with a highly polished, properly shaped moldboard and share could scour itself as it turned the furrow slice. In 1837 he made such a plow, using steel from a broken saw blade; he tested the innovation on a nearby farm. (He sold only three in 1838 but was making 25 a week by 1842.)
The "self polishers" made from discarded saw blades now were in great demand and suddenly the blacksmith had become the manufacturer. On the plains, there were limited quantities of the quality materials he required; so, in 1843 the entrepreneur arranged for a shipment of special rolled steel from England for the little plow factory. In 1846, the first slab of cast steel ever rolled in the United States was shipped from Pittsburgh to Moline, Ill., the site of the current headquarters and Deere's first big factory."
(From "The Purchasing Machine: How the Top Ten Companies Use Best Practices to Manage Their Supply Chains" by Dave Nelson, Patricia E. Moody, and Jonathan Stegner. To be published in March 2001.)
Deere's Steel Team objectives
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Transition from decentralized to coordinated purchasing,
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Standardize steel sizes and grades,
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Remove transaction and handling costs,
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Reduce leadtimes and inventories,
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Reduce the number of suppliers,
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Standardize buying practices,
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Define best use for buying via the Internet, and
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Develop global buying strategy for global supply base.
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